“The world we know is collapsing.”
- Peter Zeihan
Don’t tell that to my Canadian friends. The Stanley Cup is still #on.
You generally don’t want to be of the “world collapsing” view at every time and price in macro markets either. Last week we had a series of textbook and globally interconnected immediate-term TRADE #oversold signals to capitalize on.
Zeihan isn’t a fear mongering guy trying to sell books. He’s an excellent author and student of Global Macro history who has an especially impressive and deliberate knowledge of how geography impacts geopolitical risk.
The aforementioned quote comes from a book he just published titled Dis-United Nations where he argues that “The Americans have changed their mind about their alliance and have turned sharply more insular.”
More on that in our Q4 Global Macro Themes presentation @HedgeyeTV tomorrow.
Back to the Global Macro Grind…
Welcome to the last Macro Monday of September 2020. Oh what a September it’s been!
Let’s start with what the Global Currency market did last week:
- US Dollar Index ramped +1.8% on the week after moving to Bullish TRADE (but remaining Bearish @Hedgeye TREND)
- EUR/USD corrected -1.8% last week but remains Bullish @Hedgeye TREND (it is up +3.7% in the last 3 months)
- Yen corrected -1.0% vs. USD last week and also remains Bullish TREND @Hedgeye
- GBP/USD dropped -1.3% last week and is currently teetering as a Neutral TREND
- Brazil’s Real dropped another -3.7% vs. USD last week and is -3.5% in the last 3 months = Bullish TREND
- Canadian Dollar fell -1.4% vs. USD last week but, like the Euro, remains Bullish @Hedgeye TREND as well
Since the probability rose (again) to > 43% last week (from 40% in the week prior) that we have a #Quad4 in Q4 of 2020, it should surprise no one that A) the Dollar went up and B) most things highly (and inversely) correlated to USD went down.
Trick or treat – TRADE or TREND?
I don’t know. And it’s ok not to know. Whoever told you they’d know where we’d be during #Quad3 in Q3 of 2020 back at The Cycle peak for the US economy in Q3 of 2018 gets free socially distanced beers, on us.
In addition to Dollar Up, what else happens in #Quad4?
A) US Treasury Yields fall – US 10yr Yield drooped another -4 basis points last week to 0.65%
B) High Yield OAS Spread widens – it widened +47 basis points last week to +537bps over Treasuries
C) Stocks and Commodities go down – the higher the beta and smaller cap it was last week, the worse
Remember all the Old Wall talking points (from only 1 and 3 months ago) on being long the “rotation” and small cap value “trade”?
- Energy Stocks (XLE) collapsed another -10.2% last week
- Financials (XLF) got pounded for another -4.8% loss last week
- Russell 2000 (IWM) was down another -4.0% last week (vs. SPY -0.6%)
Yes, SPY was down for the 4th week in a row, but at least it’s only down -7.9% from its all-time high. The Russell got rotated to down -15.3% from its cycle peak. And our fav Sector Short (Financials, XLF) are:
A) Down -5.9% in the last 3 months… vs.
B) Utilities (XLU) up +0.3% last week and +5.3% in the last 3 months
Utes are boring but they do fine in both #Quad3 and #Quad4. Why? Because real yields aren’t going up during either a Stagflating Recession or #Quad4 Deflation. Long Utes (XLU) is really just a rates bet that we have a central tendency to time right.
What’s also obvious is that you can’t buy Utilities or REITS or anything equity when the VIX is about to ramp into the wrong Volatility Regime (i.e. VIX > 30). That said, if you’re running net short, Financials and Small Cap (and High Beta) go down more!
Global Equity Beta didn’t like having a #Quad4 Dollar Up week either:
- Emerging Market Equities (MSCI) dropped -4.5% last week to +5.4% in the last 3 months
- Chinese Equities corrected -3.6% last week to +8.1% in the last 3 months
- Spanish Stocks continued to crash, down another -4.4% last week, and -8.8% in the last 3 months
That’s right. When you report your Q3 2020 returns to either your investors or your spouse, tell them you aren’t long some rotating “value” narrative in Spain or US Bank Stocks – you are long of China being in #Quad2!
While it was a great quarter being long both Gold and Commodities, it was more great if you sold down those gross long exposures on our Bullish TRADE signal on the USD a few weeks back. Not confusing TRADEs with @Hedgeye TRENDs:
A) Gold corrected -4.6% (TRADE) last week to +5.5% (TREND) in the last 3 months
B) Commodities (CRB Index) corrected -2.1% last week to +9.6% in the last 3 months
Where to for everything from here? I don’t know. I do know I have a process to probability weight my incremental (daily) decisions though. With the US Dollar signaling immediate-term TRADE #overbought late last week, I took my gross long exposure to Gold back up.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.64-0.70% (bearish)
SPX 3 (neutral)
RUT 1 (bearish)
NASDAQ 10,520-11,214 (bearish)
Utilities (XLU) 56.53-60.16 (bullish)
Financials (XLF) 22.61-24.31 (bearish)
Shanghai Comp 3 (bullish)
VIX 24.66-30.03 (bullish)
USD 92.35-95.04 (bearish)
EUR/USD 1.16-1.19 (bullish)
USD/YEN 104.25-105.92 (bearish)
GBP/USD 1.26-1.30 (neutral)
Oil (WTI) 38.12-41.68 (neutral)
Gold 1 (bullish)
Copper 2.93-3.12 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
